Introduction
Today the market is flooded with zero percent interest rates purchase schemes where a consumer is lured with attractive offers to buy electronic gadgets and expensive things like cars.
People find these offers irresistible; fail to analyze the invisible trap set like processing fee and other hidden charges.
The solution to handle such special expenses is starting a SIP.
Many investors ask, “How to start SIP?” The answer is simple: instead of falling into the EMI trap, channel that same amount into a SIP and watch it grow.
Table of Contents:
- EMI – An overview
- How zero percent interest schemes influence the investors?
- Understanding SIP Basics
- SIP Merits
- SIP Calculator
- Can SIP be paid through a credit card?
- Conclusion
EMI – An overview
The advent and maximization of credit card usage have led to an increase in zero percent interest offers.
Today credit cards are easily available unlike the past where it was considered a privilege to possess one.
People consider it a status symbol to have multiple cards. An often-quoted joke is Credit card is the devil’s most precious gift to mankind.”
A host of services and products are available on EMI at zero percent interest.
People are flooded with offers from credit card providers and are explicitly convinced of how EMI’s ease the burden of paying upfront.
We often fall prey and fail to realize that it may involve hidden costs. These costs mount towards interest and are collected upfront.
For example if zero percent interest scheme on a product worth Rs. 50,000 is for a period of 6 months and an upfront service charge of 4% is levied, the purchaser pays up Rs. 2000 upfront.
A significant outcome of zero percent interest schemes is, it is generally offered on MRP unlike upfront cash payment which entitles us for a discount.
The cost difference between MRP and discount is also to be borne by the purchaser.
Many do not realize that EMI vs SIP is a game changer. While EMIs drain your cash flow, SIPs build wealth.
That’s why financial planners often compare SIP and EMI as two opposite roads to financial outcomes.
How zero percent interest schemes influence the investors?
Though we are aware of our financial constraints the desire to own the latest, works in favour of EMI.
Leading retail chain stores and consumer durables confirm that their sales have increased manifold after the launch of zero percent EMI.
The way to maximize profit and also get prolonged pleasure through delayed gratification is to start a Systematic investment plan. (SIP)
Many young investors ask, “What happens if I stop paying my SIP?” Unlike EMI stop, where you still owe money, SIP stop doesn’t create debt—it only halts your wealth creation journey.
Understanding SIP Basics
A basic understanding of what a SIP is, makes it more preferable than zero percent interest schemes.
A SIP enables a person to invest a fixed amount in the stock market or debt regularly (monthly or quarterly) for a fixed period of time.
An equity fund SIP is similar to a recurring deposit (RD) but the amount is invested in mutual funds and the returns are higher than an RD but subject to market risk.
A debt fund sip is like a recurring deposit and here the risk is very less and you can expect slightly better return than the RD.
In SIP, an investor commits to invest a fixed amount every month for a specific period of time.
The minimum amount is Rs.100 per month.
Unlike an RD where the interest rate is fixed SIPs give a higher return on investment.
SIP introduction is simple: you choose a scheme, set the SIP start date, and continue investing. Over time, compounding works in your favor.
SIP Merits
To purchase expensive items, start specific Sip’s. For example, to purchase a LED TV priced at Rs. 75, 000 starts a SIP called “LED SIP”.
Set a target time for the purchase, say 10 months.
You can do a SIP of 7500 Rs per month for 10 months.
It is prudent to account for ten percent more than the actual price when initiating a SIP to handle future price revision if any.
Based on the financial goals choose the appropriate type of SIP.
For short term goals choosing “debt as an asset class” helps, it can be a debt mutual fund or FD (Fixed Deposit) or RD.
For long term goals (7-9 years) “SIP in equity” is the choice and for midterm say 5 years, a combination of debt and equity works best.
Generally, once a purchase is made or lifestyle change is initiated through an acquired product we get accustomed to it and stop deriving pleasure after a while, take it for granted.
However, if we opt for future purchase through SIP we keep thinking/dreaming about it.
The dream is for a definite period since our financial goal has already been set.
Imagine starting a SIP to purchase a car. Every month you would think about driving a brand new car.
This gives pleasure free of cost. Finally when you redeem the amount it gives satisfaction and pride.
“I deserve it” will be your thought, a sense of achievement sets in. You do not incur direct/hidden costs.
SIP paves way for delayed gratification which eventually becomes prolonged.
Some people also wonder, “Can SIP be paid through credit card?” While a few platforms allow it, experts advise linking SIP to your bank account to avoid debt traps.
SIP Calculator
Choose your desired SIP amount and let’s calculate the returns on your Mutual Fund Investment using the Mutual Fund Calculator, shown below:
For better clarity, always check the SIP interest rate assumptions in calculators.
While SIPs don’t have fixed interest like EMIs, the expected returns are based on fund performance.
Can SIP be paid through a credit card?
A common query is whether SIP payment through credit card is possible.
Technically, some platforms do allow SIP via credit cards, but financial planners advise against it.
Using credit cards for SIP can turn an investment into debt if not repaid in time.
It’s always better to link your SIP to a savings account or auto-debit mandate for smooth, disciplined investing.
Conclusion
Understanding EMI’s, their influence on our ego, their disadvantages and how to overcome the hurdles of impulsive purchases is what we scrutinized and the solution we have chosen is SIP.
Unlike hidden costs in zero percent investment schemes SIPs ensure transaction transparency.
The simplicity of SIP and its working principles make it the most preferred investment option.
If you are REALLY inclined to make this solid difference in achieving your financial goals by creating a financial plan, then I would suggest you test-drive our services by opting for
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